Rogues of Wall Street

CHAPTER 12 Spreadsheet Risk: Should We Ban Excel?

Anyone working with spreadsheets knows how useful and indispensable they can be. At the same time, it is also well known how easy it is to make an error, perhaps in an embedded formula or a cell reference. A colleague of mine who works in the area of financial model risk has spent a good deal of time and money fixing spreadsheets that have errors in them—errors that can have significant impact on financial results and public reporting of financial results. This chapter looks at this risk and what can be done to mitigate it.

In 2013, we learned that spreadsheet errors may also have been indirectly responsible for extending the financial crisis in Europe a year or two longer than it might have otherwise been. It was discovered that a spreadsheet error was behind the results of a study that was influential in the setting of austerity measures in Europe post financial crisis.¹ These measures, albeit indirectly, led to job losses across Europe and the United States. If these losses occurred as a result of an influential piece of research that was based on a spreadsheet error, this surely qualifies as a very significant operational risk event.

So what happened exactly? Two Harvard professors, Carmen Reinhart and Kenneth Rogoff, wrote a research paper in 2010 called “Growth in a Time of Debt.” The paper by two very well‐known and respected economists claimed that there was a close correlation between a country's growth rates and ...